The Tax Policy Center has examined the key tax proposals in President Obama’s 2013 budget. Separate discussions below describe each of the proposals including current law, proposed changes, and, when appropriate, the distributional effects. The budget as presented by the president lacks complete details on many of the tax proposals. Some provisions had virtually no detail, and our discussion of them is necessarily limited.
The budget assumes a baseline in which the 2001–03 tax cuts are permanently extended for all taxpayers, the estate tax applies at its 2012 level, and parameters for the alternative minimum tax (AMT) are permanently indexed for inflation from their 2011 levels. Those provisions would reduce revenues (or increase spending) by $4.5 trillion from 2013 through 2022 (table 1).*
Relative to that baseline, the president’s proposals would raise an additional $1.7 trillion in revenue (net of outlays for refundable credits) over the coming decade. That revenue gain is composed of two kinds of tax change: about $400 billion in revenue lost to a variety of tax reductions and $2.1 trillion in added revenue from tax increases (table 2). About $160 billion of the tax cuts would result from making permanent provisions in the 2009 stimulus act mostly for low- and middle-income households and another $160 billion would be due to various business tax cuts. The remaining $100 billion of cuts would fund, among other things, the last three months of the 2012 payroll tax reduction and extension of various expiring provisions. On the revenue-increase side, about 40 percent of additional revenues would result from not extending the 2001-03 tax cuts for high-income households, about 28 percent from limiting the value of itemized deductions to 28 percent (affecting only high-income taxpayers), about 18 percent from various income tax increases on businesses, and the balance from miscellaneous tax increases.
TPC’s analysis measures the impact of the tax proposals not against the administration baseline but rather against a current law baseline that assumes the 2001–03 tax cuts expire as scheduled in 2013 and that the AMT exemption maintains its permanent level.** In contrast to the administration’s estimate that the president’s tax proposals would yield $1.7 trillion in added revenue over ten years, measured against our current law baseline, the proposals would lose about $2.8 trillion of revenue over the 2013–22 period.
Many observers assert that using a current law baseline to measure revenue change is unrealistic since few people believe that Congress and the president would allow complete expiration of the 2001–03 tax cuts or the permanent law AMT to take effect. They argue that measuring policy proposals against a current policy baseline that assumes the tax law in effect this year provides a more realistic assessment of their impact on federal revenues. Relative to that baseline, TPC estimates that the president’s proposals would raise about $2.1 trillion over the coming decade (table 3). About three-fifths of that amount would come from tax increases on high-income taxpayers, higher estate taxes, and allowing some temporary tax provisions to expire as scheduled. The rest of the revenue gain would result from proposals that are not part of this year’s tax law.
A collection of distributional tables shows how the president’s tax proposals would affect taxpayers at different income levels, relative to both current law and current policy baselines. Detailed tables examine individual proposals and combinations of proposals. Note that the distributional effects of the proposals would change over time because many of them are not indexed for inflation. As a result, some of the proposed tax cuts would benefit fewer taxpayers in future years, and the value of some of the cuts would shrink. Even provisions that are indexed for inflation would affect more or fewer taxpayers over time because of changes in real income.
Relative to current law, the entire package of proposals would reduce taxes in 2013 for nearly three-quarters of all households and raise taxes for about 6 percent (see table). People at both ends of the income distribution would be least likely to see their taxes go down: only about 30 percent of both those in the bottom quintile (20 percent of tax units) and those in the top 1 percent would see their taxes go down. At the same time, 71 percent of those in the top 1 percent would face a tax increase, compared with just 1 percent of those in the next-to-top quintile (60th through 80th percentiles). On average, taxes would drop an average of more than 1,300 in 2013. Among income groups, only the top 1 percent would see an average tax increase—more than $18,000.
The story is quite different measured against a current policy baseline that is essentially the tax law in place for 2011 (see table). Against that baseline, only 12 percent of taxpayers would see their taxes go down in 2013 under the president’s proposals while more than a quarter would experience a tax increase. The average federal tax bill would rise by about $800. People in the lowest income quintile would be least affected—less than 15 percent would experience any tax change—while virtually everyone in the top 1 percent (97 percent) would see their taxes go up by an average of almost $98,000, cutting their average after-tax income by roughly 8 percent.
This analysis is preliminary and we will update it as more information becomes available and as the budget works its way through Congress.
* Refundable tax credits count as outlays in the federal budget. The administration’s budget baseline increases those outlays by $252 billion over the coming decade.
** Congress has repeatedly “patched” the AMT by increasing its exemption for one-year periods. Our current law baseline assumes no such patches in future years.